Managerial Finance - Exam 2
Tiffany Company has two divisions, Gold and Silver. Gold produces a unit that silver could use in its production. Silver currently is purchasing 49,200 units from an outside supplier for $17. Gold is operating at less than full capacity and has variable costs of $5.50 per unit. The full cost to manufacture the unit is $12. Gold currently sells 449,200 units at a selling price of $19. If an internal transfer is made, variable shipping and administrative costs of $2.50 per unit could be avoided. How much profit will Gold receive from the transfer if a transfer price of $14.50 is agreed upon? a) $282,900 b) $565,800 c) $332,900 d) $898,700
b) $565,800 explanation: [$14.50 - ($5.50 - $2.50)] x 49,200 = $565,800
Idaho Corp. has fixed costs of $49,500 and a contribution margin ratio of 45%. Currently, sales are $198,000. What is Idaho's margin of safety? a) $68,400 b) $88,000 c) $107,600 d) $176,000
b) $88,000 explanation: $198,000 - ($49,500 / 0.45) = $88,000
Georgia uses the high-low method of estimating costs. Georgia had total costs of $16,100 at its lowest level of activity, when 5,000 units were sold. When, at its highest level of activity, sales equaled 12,800 units, total costs were $86,300. Georgia would estimate variable cost per unit as: a) $3.22 b) $9.00 c) $6.74 d) $5.75
b) $9.00 explanation: ($86,300 - $16,100) / (12,800 - 5,000) = $9.00/unit
Avocado Company has an operating income of $136,000 on revenues of $1,092,000. Average invested assets are $544,000, and Avocado Company has an 8% cost of capital. What is the profit margin? a) 25% b) 12% c) 8% d) 17%
b) 12% explanation: $136,000 / $1,092,000 = 12%
Mustang Corp. has a selling price of $24, variable costs of $15 per unit, and fixed costs of $46,350. How many units must be sold to break-even? a) 1,931 b) 5,150 c) 10,300 d) 3,090
b) 5,150 explanation: $46,350 / ($24 - $15) = 5,150
Frontier Corp. has a contribution margin of $1,682,000 and profit of $336,400. What is its degree of operating leverage? a) 0.20 b) 5.00 c) 5.80 d) 14.50
b) 5.00 explanation: $1,682,000 / $336,400 / 5.00
A mixed cost has: a) either fixed or variable cost components, but not both b) both fixed and variable cost components c) only variable cost components, both within and outside of the relevant range d) only fixed cost components, both within and outside of the relevant range
b) both fixed and variable cost components
The cost estimating approach that uses the two most extreme activity observations is the: a) scattergraph method b) high-low method c) visual fit method d) regression analysis
b) high-low method
Which of the following is not an advantage of decentralization? a) allows top managers to focus on strategic issues b) potential duplication of resources c) allows for development of managerial expertise d) managers can react quickly to local information
b) potential duplication of resources
A cost that changes, in total, in direct proportion to changes in activity level is a(n): a) absorption cost b) variable cost c) contribution margin d) fixed cost
b) variable cost
Calculating Break-Even Using Contribution Margin Ratio
break-even sales ($) = total fixed costs / contribution margin ratio (%)
Calculating Break-Even Using Unit Contribution Margin
break-even units (Q) = total fixed costs / unit contribution margin
Maple Corp. has a selling price of $21, variable costs of $11 per unit, and fixed costs of $21,500. Maple expects profit of $314,000 at its anticipated level of production. What is Maple's unit contribution margin? a) $21.00 b) $10.50 c) $10.00 d) $26.50
c) $10.00 explanation: unit contribution margin = unit sales price - variable costs per unit $21 - $11 = $10
Ajax uses the high-low method of estimating costs. Ajax had total costs of $50,940 at its lowest level of activity, when 5,800 units were sold. When, at its highest level of activity, sales equaled 15,100 units, total costs were $80,700. Ajax would estimate fixed costs as: a) $29,760 b) $63,500 c) $32,380 d) $131,640
c) $32,380 explanation: step 1: ($80,700 - $50,940) / (15,100 - 5,800) = $3.20/unit step 2: $80,700 - ($3.20 x 15,100) = $32,380
Frontier Corp. has fixed costs of $335,170 and profit of $121,000. What is its degree of operating leverage? a) 0.36 b) 2.41 c) 3.34 d) 3.77
d) 3.77 explanation: step 1: CM = $335,170 + $121,000 = $456,170 step 2: $456,170 / $121,000 = 3.77
All else being equal, if sales revenue doubles, fixed costs will: a) decrease in total b) increase in total c) increase on a per unit basis d) decrease on a per unit basis
d) decrease on a per unit basis
If the ROI of a project is greater than the hurdle rate, the residual income will be: a) equal to operating income b) greater than operating income c) greater than average invested assets d) greater than zero
d) greater than zero
A statistical method for finding the best-fitting cost equation to a set of data is the: a) scattergraph method b) high-low method c) visual fit method d) least-squares regression method
d) least-squares regression method
The contribution margin ratio is: a) the contribution margin stated as a percentage of profit b) the contribution margin stated as a percentage of total costs c) the contribution margin stated as a percentage of fixed costs d) the contribution margin stated as a percentage of sales
d) the contribution margin stated as a percentage of sales
Which of the following statements about leverage is not correct? a) measuring the degree of operating leverage is a form of measuring risk b) decisions about the use of debt or equity affect a company's financial leverage c) decisions about whether to use fixed or variable costs affect a company's operating leverage d) the degree of financial leverage measures the extent to which fixed costs are used to operate the business
d) the degree of financial leverage measures the extent to which fixed costs are used to operate the business
Degree of Operating Leverage Formula
degree of operating leverage = contribution margin / operating income
Margin of Safety Ratio (%) Formula
margin of safety (%) = (actual or budgeted sales - break even sales) / actual or budgeted sales
Degree of Operating Leverage
measures the extent to which fixed costs are used to operate the business
Cost Behavior
refers to the way total cost changes when some measure of activity changes; when we analyze this, we must limit our analysis to the relevant range
Target Profit Analysis Using Contribution Margin Ratio
target sales($) = (total fixed costs + target profit) / contribution margin ratio (%)
Target Profit Analysis Using Unit Contribution Margin
target units (Q) = (total fixed costs + target profit) / unit contribution margin
Linearity Assumption
the assumption that the relationship between two variables (x and y) can be approximated by a straight line
Unit Contribution Margin
the difference between the unit sales price and unit variable costs; tells us how profit (or loss) will change as a result of selling one more (or fewer) unit
Break-Even Analysis
the goal is to determine the level of sales (in either units or total sales dollars) needed to earn $0 profit
Relevant Range
the range of activity over which assumptions about cost behavior are expected to hold true
In what type of organization is decision-making authority spread throughout the organization? a) decentralized organization b) centralized organization c) participative organization d) top-down organization
a) decentralized organization
A step cost: a) is fixed over some range of activity b) is a fixed cost over the relevant range and a variable cost everywhere else c) contains both fixed and variable components d) increases in direct proportion to changes in activity
a) is fixed over some range of activity
A graph that provides a visual representation of the relationship between total cost and activity level is called a: a) scattergraph b) relevant range c) contribution margin graph d) dependent variable
a) scattergraph
The break-even point is: a) the point where zero profit is earned b) the point where zero contribution margin is earned c) the point where selling price just equals variable cost d) equal to sales revenue less fixed costs
a) the point where zero profit is earned
Cost behavior is: a) the way in which costs change when the activity level changes b) the difference between sales revenue and fixed costs c) the same as absorption costing d) the amount of sales necessary to achieve a specific profit
a) the way in which costs change when the activity level changes
Total contribution margin is defined as: a) total sales revenues less total variable costs b) selling price times units sold c) cost to produce times units sold d) total variable costs less fixed costs
a) total sales revenues less total variable costs
Jasmine Inc. sells a product for $69 per unit. Variable costs per unit are $34, and monthly fixed costs are $329,000. a. What is the break-even point in units? b. What unit sales would be required to earn a target profit of $129,500? c. Assume they achieve the level of sales required in part b, what is the margin of safety in sales dollars?
a. 9,400 units explanation: break-even units = fixed costs / unit contribution margin 9,400 units = $329,000 / ($69 - $34) b. 13,100 units explanation: target units = (fixed costs + target profit) / UCM 13,100 units = ($329,000 + $129,500) / ($69 - $34) c. $255,300 explanation: margin of safety = actual sales - break even sales $255,300 = (13,100 units - 9,400 units ) x $69
Target Profit Analysis
an extension of break-even analysis that allows managers to determine the number of units or total sales revenue needed to earn a target profit
Orchid Corp. has a selling price of $20, variable costs of $16 per unit, and fixed costs of $25,500. If Orchid sells 10,000 units, contribution margin will equal: a) $14,500 b) $40,000 c) $105,500 d) $115,500
b) $40,000 explanation: contribution margin = sales revenue - variable costs ($20 x 10,000) - ($16 x 10,000) = $40,000
Match the assumption for cost behavior patterns used in cost-volume-profit analysis with its corresponding explanation. Your choices are: 1. only volume affects total cost and total revenue 2. there is a linear relationship between cost and revenue 3. there is a constant product mix 4. all costs can be classified as either fixed or variable 5. production volume is equal to sales volume Match each of the options above to the items below. -Determine the total fixed and variable costs per unit (including for mixed costs); step costs remain fixed within the relevant range -Even if a company makes and sells multiple products, we assume the relative proportion of units sold remains the same. -Use a straight line to approximate the relationship between total cost and sales volume and between total revenue and sales volume. -Ignore other factors that affect cost and revenue, for example employee learning curves and productivity gains. -Simplify the analysis with this assumption, even though we know some costs vary with production while others vary with sales.
-Determine the total fixed and variable costs per unit (including for mixed costs); step costs remain fixed within the relevant range (4) -Even if a company makes and sells multiple products, we assume the relative proportion of units sold remains the same. (3) -Use a straight line to approximate the relationship between total cost and sales volume and between total revenue and sales volume. (2) -Ignore other factors that affect cost and revenue, for example employee learning curves and productivity gains. (1) -Simplify the analysis with this assumption, even though we know some costs vary with production while others vary with sales. (5)
Contribution Margin Income Statement
-sales revenue -less: variable costs -contribution margin -less: fixed costs -net operating income
Tempe Office Services and Supplies (TOSS) provides various products and services in the Tempe Research Park, home to numerous high-tech and bio-tech companies. Making color copies is one of its most popular and profitable services. The controller performed a regression analysis of data from the Color Copy Department with the following results: Intercept: 238.69 R square: 0.968 Number of observations: 6 X coefficient: 0.069 The regression output was based on the following data: July: 17,000 copies, $1,445 August: 21,250 copies, $1,658 September: 22,950 copies, $1,785 October: 18,700 copies, $1,530 November: 20,400 copies, $1,615 December: 25,500 copies, $2,040 1. What is the variable cost per color copy for TOSS? 2. What is the fixed cost for the Color Copy Department? 3. Based on the regression output obtained by the controller, what cost formula should be used to estimate future total costs for the Color Copy Department?
1. $0.069/color copy 2. $238.69 3. y = $238.69 + $0.069x
Dana's Ribbon World makes award rosettes. Following is information about the company: Variable cost per rosette: $1.60 Sales price per rosette: $3.00 Total fixed costs per month: $889.00 1. Suppose Dana's would like to generate a profit of $800. Determine how many rosettes it must sell to achieve this target profit. 2. If Dana's sells 1,100 rosettes, compute its margin of safety in units, in sales dollars, and as a percentage of sales. 3. Calculate Dana's degree of operating leverage if it sells 1,100 rosettes. 4. Using the degree of operating leverage, calculate the change in Dana's profit if unit sales drop to 935 units.
1. 1,207 rosettes explanation: target units (#) = (total FC + target profit) / UCM target units (#) = ($889 + $800) / $1.40 = 1,207 rosettes 2. MoS (#) = 465 rosettes MoS ($) = $1,395 MoS (%) = 42.27% explanation: MoS (#) = actual sales - BE units MoS (#) = 1,100 - 635 = 465 rosettes MoS ($) = actual sales - BE sales MoS ($) = (1,100 x $3) - $1,905 = $1,395 MoS (%) = MoS ($) / actual sales MoS (%) = $1,395 / $3,300 = 42.27% 3. 2.3656 explanation: DOL = (UCM x # units) / CM - total FC DOL = ($1.40 x 1,100) / ($1,540 - $889) = 2.3656 4. -35.48% explanation: change in sales (%) = (935 - 1,100) / 1,100 = -15% -15% x 2.3656 = -35.48%
Dana's Ribbon World makes award rosettes. Following is information about the company: Variable cost per rosette: $1.60 Sales price per rosette: $3.00 Total fixed costs per month: $889.00 1. Determine how many rosettes Dana's must sell to break-even. 2. Calculate the break-even point in sales dollars.
1. 635 rosettes explanation: BE units = total FC / UCM BE units = $889 / $1.40 = 635 rosettes 2. $1,905 explanation: BE sales = BE units x sales price BE sales = 635 x $3.00 = $1,905
Cost-Volume-Profit (CVP) Analysis
a decision-making tool that focuses on the relationship among the volume and mix of units sold, prices, variable costs, fixed costs, and profit
Merlot Inc. has fixed costs of $210,000, sales price of $54, and variable cost of $39 per unit. How many units must be sold to earn profit of $30,000? a) 13,500 b) 16,000 c) 23,500 d) 6,000
b) 16,000 explanation: ($210,000 + $30,000) / ($54 - $39) = 16,000
Contribution Margin Formula
contribution margin = sales revenue - variable costs
Margin of Safety ($) Formula
margin of safety ($) = actual or budgeted sales - break even sales
Margin of Safety
the difference between actual or budgeted sales and the break-even point
Contribution Margin
the difference between sales revenue and variable costs; can be expressed in total, per unit, or as a percentage or ratio of sales
Calculating Break-Even Using the Profit Equation
total sales revenue - total variable costs - total fixed costs = profit OR (unit price x Q) - (unit variable costs x Q) - total fixed costs = profit
Unit Contribution Margin Formula
unit contribution margin = unit sales price - variable cost per unit
Variable Cost Per Unit Formula
variable cost per unit = (total cost hi - total cost lo) / (activity hi - activity lo)
Linear Equation
y = a + bx y = total costs a = total fixed costs b = variable cost per unit x = level of activity
Cove's Cakes is a local bakery. Price and cost information follows: Price per cake: $17.00 Variable cost per cake Ingredients: $2.50 Direct labor: $1.40 Overhead: $0.20 Fixed cost per month: $3,850.00 1. Determine Cove's break-even point in units and sales dollars. 2. Determine the bakery's margin of safety if it currently sells 450 cakes per month. 3. Determine the number of cakes that Cove must sell to generate $2,000 in profit.
1. BE units = 299 cakes BE sales = $5,083 explanation: BE units = total FC / UCM $3,850 / $12.90 = 299 BE sales = 299 x $17 = $5,083 2. MoS ($) = $2,567 explanation: MoS ($) = actual sales - BE sales MoS ($) = (450 cakes x $17) - $5,083 = $2,567 3. target units = 454 cakes explanation: target units = (total FC + target profit) / UCM target units = (3,850 + 2,000) / $12.90 = 454 cakes
Morning Dove Company manufactures one model of birdbath, which is very popular. Morning Dove sells all units it produces each month. The relevant range is 0 to 1,500 units, and monthly production costs for the production of 500 units follow. Morning Dove's utilities and maintenance costs are mixed with the fixed components shown in parentheses. Direct materials: $1,500 Direct labor: $7,500 Utilities ($100 fixed): $650 Supervisor's salary: $3,000 Maintenance ($280 fixed): $480 Depreciation: $800 1. Identify each cost as variable, fixed, or mixed, and express each cost as a rate per month or per unit (or combination thereof). 2. Determine the total fixed cost per month and the variable cost per unit for Morning Dove. 3. State Morning Dove's linear cost equation for a production level of 0 to 1,500 units. 4. Calculate Morning Dove's expected total cost if production increased to 1,200 units per month.
1. Direct materials: variable cost, $3/unit Direct labor: variable cost, $15/unit Utilities: mixed cost, $100/month, $1.10/unit Supervisor's salary: fixed cost, $3,000/month Maintenance: mixed cost, $280/month, $0.40/unit Depreciation: fixed cost, $800/month explanation: Direct materials: $1,500 / 500 = $3/unit Direct labor: $7,500 / 500 = $15/unit Utilities: $550 / 500 = $1.10/unit Supervisor's salary: $3,000/month Maintenance: $480 / 500 = $0.40/unit Depreciation: $800/month 2. Fixed costs = $4,180/month Variable costs = $19.50/unit explanation: FC: $100 + $3,000 + $280 + $800 = $4,180/month VC: $3 + $15 + $1.10 + $0.40 = $19.50/unit 3. y = $4,180 + $19.50x explanation: y = a + bx -> TC = FC + (VC/unit x # units) 4. $27,580 explanation: y = $4,180 + $19.50(1,200 units) = $27,580
Morning Dove company manufactures one model of birdbath, which is very popular. Morning Dove sells all units it produces each month. The relevant range is 0 to 1,700 units, and monthly production costs for the production of 1,300 units follow. Morning Dove's utilities and maintenance costs are mixed with the fixed components shown in parentheses. Suppose it sells each birdbath for $22. Direct materials: $2,900 Direct labor: $7,700 Utilities ($140 fixed): $630 Supervisor's salary: $3,300 Maintenance ($350 fixed): $510 Depreciation: $750 1. Calculate the unit contribution margin and contribution margin ratio for each birdbath sold. 2. Complete the contribution margin income statement assuming that Morning Dove produces and sells 1,500 units.
1. UCM = $13.35/unit CMR = 60.68% explanation: UCM = sales price per unit - variable cost per unit UCM = $22 - $8.65 = $13.35 CMR = unit contribution margin / sales price per unit CMR = $13.35 / $22 = 60.68% 2. sales revenue: $33,000 variable costs: ($12,975) contribution margin: $20,025 fixed costs: ($4,540) net operating income: $15,485 explanation: sales revenue: 1,500 units x $22 = $33,000 variable costs: 1,500 units x $8.65 = $12,975
Juniper Enterprises sells handmade clocks. Its variable cost per clock is $6, and each clock sells for $24. 1. Calculate Juniper's contribution margin per unit and contribution margin ratio. 2. Determine how many clocks Juniper must sell to break even if the company's fixed costs total $6,660. 3. How many units must Juniper sell to earn a profit of at least $5,400?
1. UCM = $18/clock CMR = 75% explanation: UCM = sales price - VC/unit UCM = $24 - $6 = $18/unit CMR = UCM / sales price CMR = $18 / $24 = 0.75 or 75% 2. 370 clocks explanation: break-even units (Q) = total FC / UCM $6,660 / $18 = 370 clocks 3. 670 clocks explanation: target units (Q) = (total FC + target profit) / UCM ($6,660 - $5,400) / $18 = 670 clocks
Last month, Laredo Company sold 630 units for $115 each. During the month, fixed costs were $8,050 and variable costs were $69 per unit. 1. Determine the unit contribution margin and contribution margin ratio. 2. Calculate the break-even point in units and sales dollars. 3. Compute Laredo's margin of safety in units and as a percentage of sales.
1. UCM = $46 CMR = 40% explanation: UCM = sales price - variable cost per unit UCM = $115 - $69 = $46 CMR = UCM / sales price CMR = $46 / $115 = 40% 2. break-even units = 175 units break-even sales = $20,125 explanation: BE units = total FC / UCM BE units = $8,050 / $46 = 175 units BE sales = break-even units x sales price BE sales = 175 x $115 = $20,125 3. margin of safety = 455 units margin of safety (%) = 72.2222% explanation: margin of safety = actual sales - break even sales margin of safety = 630 - 175 = 455 units margin of safety ($) = (630 x $115) - (175 x $115) = $72,450 - $20,125 = $52,325 margin of safety (%) = margin of safety / actual sales margin of safety (%) = $52,325 / $72,450 = 72.2222
Morning Dove Company manufactures one model of birdbath, which is very popular. Morning Dove sells all units it produces each month. The relevant range is 0 to 1,500 units, and monthly production costs for the production of 500 units follow. Morning Dove's utilities and maintenance costs are mixed with the fixed components shown in parentheses. Direct materials: $1,500 Direct labor: $7,500 Utilities ($100 fixed): $650 Supervisor's salary: $3,000 Maintenance ($280 fixed): $480 Depreciation: $800 1. Calculate the unit contribution margin and contribution margin ratio for each birdbath sold. 2. Prepare a contribution margin income statement assuming that Morning Dove produces and sells 1,400 units.
1. UCM = $5.50 CMR = 22% explanation: UCM = sales price - VC/unit UCM = $25 - $19.50 = $5.50 CMR = UCM / sales price CMR = $5.50 / $25 = 22% 2. sales revenue: $35,000 less: total VC: ($27,300) contribution margin: $7,700 less: total FC: ($4,180) net operating income: $3,520 explanation: sales revenue: $25 x 1,400 = $35,000 less: total VC: $19.50 x 1,400 = ($27,300) contribution margin: $35,000 - $27,300 = $7,700 less: total FC: $4,180 (all fixed costs added) net operating income: $7,700 - $4,180 = $3,520
Mountain Dental Services is a specialized dental practice whose only service is filling cavities. Mountain has recorded the following for the past nine months: January: 625 cavities, $5,600 February: 700 cavities, $6,000 March: 500 cavities, $4,500 April: 425 cavities, $4,100 May: 450 cavities, $4,500 June: 300 cavities, $3,200 July: 375 cavities, $3,500 August: 550 cavities, $4,900 September: 575 cavities, $5,400 1. Use the high-low method to estimate total fixed cost and variable cost per cavity filled. 2. Using these estimates, calculate Mountain's total cost for filling 500 cavities. 3. How closely does your estimate match the actual cost for March?
1. VC/unit = $7/unit FC = $1,100 explanation: VC/unit: (TC hi - TC lo) / (ACT hi - ACT lo) (6,000 - 3,000) / (700 - 300) = 2,800 / 400 = $7/unit TC = FC + (VC/unit x # units) 6,000 = FC + ($7/unit x 700) 6,000 = FC + 4,900 FC = $1,100 2. TC = $4,600 explanation: TC = 1,100 + ($7/unit x 500 units) TC = 1,100 + 3,500 = $4,600 3. estimate is off by $100
Morning Dove company manufactures one model of birdbath, which is very popular. Morning Dove sells all units it produces each month. The relevant range is 0 to 1,700 units, and monthly production costs for the production of 1,300 units follow. Morning Dove's utilities and maintenance costs are mixed with the fixed components shown in parentheses. Direct materials: $2,900 Direct labor: $7,700 Utilities ($140 fixed): $630 Supervisor's salary: $3,300 Maintenance ($350 fixed): $510 Depreciation: $750 1. Identify each cost as variable, fixed, or mixed, and express each cost as a rate per month or per unit (or combination thereof). 2. Determine the total fixed cost per month and the variable cost per unit for Morning Dove. 3. State Morning Dove's linear cost equation for a production level of 0 to 1,700 units. Enter answer as an equation in the form of y = a + bx. 4. Calculate Morning Dove's expected total cost if production increased to 1,500 units per month. Enter answer as an equation in the form of y = a + bx.
1. direct materials: variable cost, $2.23/unit direct labor: variable cost, $5.92/unit utilities: mixed cost, $0.38/unit, $140/month supervisor's salary: fixed cost, $3,300/month maintenance: mixed cost, $0.12/unit, $350/month depreciation: fixed cost, $750/month explanation: direct materials: $2,900 / 1,300 = $2.23/unit direct labor: $7,700 / 1,300 = $5.92/unit utilities: $490 / 1,300 = $0.38/unit maintenance: $160 / 1,300 = $0.12/unit 2. total variable cost per unit: $8.65 total fixed cost per month: $4,540 explanation: total vc/unit: $2.23 + $5.92 + $0.38 + $0.12 = $8.65 total fc/month: $140 + $3,300 + $350 + $750 = $4,540 3. total cost = $4,540 + $8.65x 4. $17,515 explanation: $4,540 + $8.65(1,500) = $17,515
Assumptions of CVP Analysis
1. linear cost & revenue functions 2. All costs can be classified as either fixed or variable 3. Only volume affects total cost and total revenue 4. Production volume is equal to sales volume 5. Constant product mix
Cove's Cakes is a local bakery. Price and cost information follows: Price per cake: $17.00 Variable cost per cake Ingredients: $2.50 Direct labor: $1.40 Overhead: $0.20 Fixed cost per month: $3,850.00 1. Calculate Cove's new break-even point under each of the following independent scenarios: a. sales price increases by $1.00 per cake b. fixed costs increase by $500 per month c. variable costs decrease by $0.35 per cake d. sales price decreases by $0.50 per cake. 2. Assume that Cove sold 400 cakes last month. Calculate the company's degree of operating leverage. 3. Using the degree of operating leverage, calculate the change in profit caused by a 10 percent increase in sales revenue.
1a. 277 cakes 1b. 338 cakes 1c. 291 cakes 1d. 311 cakes explanation: 1a: BE units = total FC / UCM BE units = $3,850 / $13.90 = 277 cakes 1b: ($3,850 + $500) / $12.90 = 338 cakes 1c: $3,850 / ($17 - ($4.10 - $0.35) = 291 cakes 1d: $3,850 / ($17 - $0.50) - $4.10) = 311 cakes 2. DOL = 3.9389 explanation: DOL = CM / OI = UCM x # units / (CM - total FC) ($12.90 x 400) / ($5,160 - 3,850) = 3.9389 3. 39.39% explanation: change in profit = change in sales x DOL 10% x 3.9389 = 39.39%
Jasper Company has actual sales of $185,000 and break-even sales of $120,000. Compute Jasper's margin of safety and its margin of safety ratio.
MoS ($) = $65,000 MoS(%) = 35.14% explanation: MoS ($) = actual sales - BE sales MoS ($) = $185,000 - $120,000 = $65,000 MoS (%) = MoS ($) / actual sales MoS (%) = $65,000 / $185,000 = 35.14%
Degree of operating leverage is used to: a) calculate change in profit given change in sales b) calculate change in sales given change in profit c) calculate break-even sales given change in sales d) calculate break-even sales given change in profit
a) calculate change in profit given change in sales
Scattergraph
a graph that provides a visual representation of the relationship between total cost (y) and activity level (x); preparing this graph is a useful first step in analyzing cost behavior
High-Low Method
a simple approach that uses the two most extreme activity observations to determine the variable cost per unit (b) and total fixed costs (a)
Least-Squares Regression
a statistical technique for finding the best fitting line based on historical data
Skyline Corp. has a selling price of $33 per unit, variable costs of $29 per unit, and fixed costs of $20,000. What sales revenue is needed to break-even? a) $165,000 b) $5,000 c) $50,000 d) $145,000
a) $165,000 explanation: step 1: BE units = $20,000 / ($33 - $29) = 5,000 step 2: 5,000 x $33 = $165,000
Jerome Corp. has fixed costs of $158,400 and a contribution margin ratio of 22%. Currently, sales are $1,108,800. What is Jerome's margin of safety? a) $388,800 b) $1,267,200 c) $1,656,000 d) $855,360
a) $388,800 explanation: $1,108,800 - ($158,400 / 0.22) = $388,800
Avocado Company has an operating income of $108,000 on revenues of $1,002,000. Average invested assets are $507,000 and Avocado Company has an 8% cost of capital. What is the residual income? a) $67,440 b) $135,840 c) $108,000 d) $27,840
a) $67,440 explanation: $108,000 - (8% x $507,000) = $67,440
Knox Corp. has a selling price of $17, variable costs of $13.26 per unit, and fixed costs of $22,500. If Knox sells 9,000 units, the contribution margin ratio will equal: a) 22.00% b) 10.54% c) 336.60% d) 11.46%
a) 22.00% explanation: contribution margin ratio = contribution margin per unit / sales revenue per unit ($17.00 - $13.26) / $17.00 = 22.00%
Avocado Company has an operating income of $150,930 on revenues of $1,043,000. Average invested assets are $559,000, and Avocado company has a 9% cost of capital. What is the return on investment? a) 27% b) 18% c) 14% d) 9%
a) 27% explanation: $150,930 / $559,000 = 27%
Which of the following statements is not correct about cost-volume-profit analysis? a) CVP analysis works best when all variables are changed concurrently b) CVP analysis is a decision-making tool for managers c) CVP analysis focuses on the relationship among volume and mix of units sold, prices, variable costs, fixed costs, and profit d) managers use CVP analysis to evaluate how changing one key variable will impact profitability, while holding everything else constant
a) CVP analysis works best when all variables are changed concurrently
Regression analysis is a cost-estimating approach that uses _____ to find the cost line. a) all available data points b) only two data points c) only four data points d) personal intuition
a) all available data points
Tiffany Company has two divisions, Gold and Silver. Gold produces a unit that Silver could use in its production. Silver currently is purchasing 49,500 units from an outside supplier for $20.00. Gold is operating at less than full capacity and has variable costs of $8.50 per unit. The full cost to manufacture the unit is $15.00. Gold currently sells 449,500 units at a selling price of $22.00. If an internal transfer is made, variable shipping and administrative costs of $2.00 per unit could be avoided. If the internal transfer is made, what would be the impact on Tiffany Company's overall profits? a) $1,336,500 increase b) $334,125 decrease c) $668,250 increase d) no change in profits
c) $668,250 increase explanation: step 1: $8.50 - $2.00 = $6.50 step 2: ($20.00 - $6.50) x 49,500 = $668,250
Fern Inc. has fixed costs of $111,210 and a contribution margin ratio of 33%. How much sales revenue must be earned for a profit of $115,500? a) $61,830 b) $144,270 c) $687,000 d) $824,400
c) $687,000 explanation: ($111,210 + $115,500) / 33% = $687,000
Avocado Company has an operating income of $95,200 on revenues of $6,545,000. Average invested assets are $595,000 and Avocado Company has an 8% cost of capital. What is the investment turnover? a) 16.00 b) 68.75 c) 11.00 d) 6.25
c) 11.00 explanation: $6,545,000 / $595,000 = 11.00
Mira Corp. has a selling price of $63 per unit, variable costs of $43 per unit, an fixed costs of $154,000. How many units must be sold to break-even? a) 3,581 b) 2,444 c) 7,700 d) 3,422
c) 7,700 explanation: $154,000 / ($63 - $43) = 7,700
Frontier Corp. has a contribution margin of $648,000 and profit of $162,000. If sales increase 18%, by how much will profits increase? a) 18.00% b) 40.00% c) 72.00% d) 112.00%
c) 72.00% explanation: step 1: DOL = $648,000 / $162,000 = 4 4 x 18% = 72%
Which of the following balanced scorecard perspectives measures how an organization satisfies its stakeholders? a) customer b) internal business processes c) financial d) learning and growth
c) financial
A cost that remains the same, in total, regardless of changes in activity level is a: a) variable cost b) mixed cost c) fixed cost d) step cost
c) fixed cost
The margin of safety tells managers: a) how much sales would have to increase to hit the target profit b) how much profit would drop if sales decreased c) how much sales could drop before the firm no longer earns profits d) how much profit would have to increase to hit target sales
c) how much sales could drop before the firm no longer earns profits
The high-low method provides a reasonable estimate of the fixed and variable costs as long as: a) it uses eight or more points (instead of simply two) b) at least one of the two points falls within the relevant range c) the high and low points reflect the general trend of the data d) the high and low points for both activity and total fixed costs are the same
c) the high and low points reflect the general trend of the data
Contribution Margin Ratio
computed by dividing the unit contribution margin by the unit selling price or by dividing the total contribution margin by total sales revenue; shows how much a given change in sales revenue will affect the contribution margin and operating income
Contribution Margin Ratio Formula
contribution margin ratio = contribution margin / sales revenue OR unit contribution margin / unit sales price
Step Costs
costs that are fixed over some range of activity and then increase in a step-like fashion when a capacity limit is reached
Variable Costs
costs that change, in total, in direct proportion to changes in activity levels; although they change with activity, per unit variable costs remain constant, regardless of activity level examples: Starbucks -> cost of coffee beans, milk, sugar, and cups
Mixed Costs
costs that have both a fixed component and a variable component; also known as semi-variable costs
Fixed Costs
costs that remain the same, in total, regardless of activity level; while they remain fixed in total, per unit fixed costs decrease with increases in activity (because the fixed costs are spread over more units) examples: Starbucks -> cost of rent, manager salaries, depreciation on equipment, and insurance
Last month Peggy Company had a $31,744 profit on sales of $287,000. Fixed costs are $60,096 a month. What sales revenue is needed for Peggy to break-even? a) $318,744 b) $91,840 c) $31,744 d) $187,800
d) $187,800 explanation: step 1: CMR = ($31,744 + $60,096) / $287,000 = 32% step 2: $60,096 / 0.32 = $187,800
Crawford Corp. has an ROI of 22% and a residual income of $10,220. If operating income equals $44,000, what is the amount of average invested assets? a) $46,364 b) $968,000 c) $224,400 d) $200,000
d) $200,000 explanation: $44,000 / 22% = $200,000
Pecan Inc. has a contribution margin of 58% and fixed costs of $270,860. What sales revenue is needed to attain a $75,980 profit? a) $75,200 b) $470,000 c) $260,000 d) $598,000
d) $598,000 explanation: ($270,860 + $75,980) / 0.58 = $598,000
McNeil uses the high-low method of estimating costs. McNeil had total costs of $53,000 at its lowest level of activity, when 5,000 units were sold. When, at its highest level of activity, sales equaled 10,000 units, total costs were $80,000. What would McNeil estimate its total cost to be if sales equaled 8,200 units? a) $46,000 b) $44,280 c) $79,000 d) $70,280
d) $70,280 explanation: step 1: ($80,000 - $53,000) / (10,000 - 5,000) = $5.40/unit step 2: $80,000 - ($5.40 x 10,000) = $26,000 step 3: $26,000 + ($5.40 x 8,200) = $70,280
